RBI Intervention in Offshore Market: A New Era for India's Currency Market

Strategic Insights -

The Reserve Bank of India (RBI) is poised to take a significant step in its efforts to stabilize the Indian currency market as local banks are set to begin trading in the non-deliverable forwards (NDF) market. This move, expected to start on Monday, will allow banks to participate in the offshore market, curbing wild rupee swings and paving the way for much-needed RBI intervention.

Key Takeaways:

  • The RBI has allowed Indian banks to participate in the NDF market, starting from June 1, to curb wild rupee swings and enable RBI intervention in the offshore market.
  • The move will provide a level-playing field for local banks, enabling them to serve their overseas clients more efficiently and reduce hedging costs for multinational corporations (MNCs).
  • Private sector lenders such as Axis Bank, ICICI Bank, HDFC Bank, and IndusInd Bank are expected to resume trading in the NDF market, with public sector banks led by State Bank of India set to join them soon.
  • Participation of local banks in the NDF market is expected to increase liquidity, reducing hedging costs for MNCs as the bid-offer spread is expected to shrink.
  • RBI intervention in the NDF market will enable the central bank to directly address volatility in the offshore market through local banks.
  • The differential between offshore and onshore forwards rates was as much as one rupee across one-three month contracts in March, highlighting the need for RBI intervention.
  • Trading of NDFs has almost doubled over the past three years, with the Indian rupee being one of the key currencies driving the surge in NDF trading.

Statistics:

  • Daily average volume of NDF trading was about $250 billion in April last year, up from an estimated $100 billion in 2013.
  • Trading of NDFs for the Indian rupee has almost doubled over the past three years, from $100 billion in 2013 to $250 billion in 2021.
  • The NDF market has contributed significantly to the substantial increase in the trading of forwards recorded in 2019, with a Triennial Survey by the Bank of International Settlement (BIS) showing a surge in NDF trading.

Sources:

  • Economic Times (ET)
  • Bhaskar Panda, Executive Vice President, HDFC Bank
  • B Prasanna, Head of Global Markets Group, ICICI Bank
  • Anindya Banerjee, Currency Analyst, Kotak Securities
  • Bank of International Settlement (BIS) Triennial Survey